Once you have an idea about the workings of the stock market and its common terminologies, the next step in becoming a stock market pro is learning how to read stock charts. For a novice investor, reading charts is an integral skill required to identify the viable stock in which their money can be invested. The selection of the right stock to add to your portfolio will decide the profits and returns you earn in the future. Let’s dive into understanding more about the stock charts and how one can read them.
What is a stock chart?
Charts are the primary tools in technical analysis, giving a graphical representation, visualizing and plotting the historical data of price movements of a particular stock against time. The value of the stocks helps the investor spot common patterns in the charts, which helps in predicting the future movements of the stock. If a stock is poised to break out and become profitable an investor who has chart-reading skills has the upper hand compared to others.
Charts make it easier to predict where a stock is going, as prices tend to form patterns at regular intervals. Depending on the interpretation methods adapted by an investor, they will invest in the stock, and only time will tell whether their take was right or wrong. However, better-informed trading with charts gives an investor a higher probability to earn higher returns.
How Do Charts Help Investors?
Foreshadowing and Forecast: As discussed above stock charts help investors to develop investment strategies and make educated decisions. When analysing charts, one finds out the different price-volume areas where important decisions to buy, sell or hold equities must be made.
Market Trends: The price pattern traced in the chart and their fluctuations give an understanding of the general trends in the stock market. An investor who identifies the possible movement of the market makes huge profits from his portfolio as a whole as well.
Others: Other than helping in technical analysis, they also provide information about current trading prices, historical highs and lows, the volume of the stock, and the company’s financial position.
Components of Stock Charts
The X-axis of the chart represents the time and the Y-axis represents the price. There are two types of indicators: on-chart and off-chart. The on-chart indicators include moving averages and Bollinger bands. On the other hand, off-chart indicators include aspects like relative strength index and volume.
Stock symbol: The stock of the company is referred to using a unique symbol for identification purposes. This symbol is called a stock symbol or a ticker.
Stock Exchange: Another component of the stock chart is the exchange on which the stock of the particular company is traded.
Time: The stock chart provides you with the stock prices plotted over a specified time period. The time may vary ranging from weekly, monthly, quarterly, and annually.
Price: The chart gives you four important pieces of information about a stock’s price. The opening, highest, lowest, and closing prices are the critical indicators for your buy or decision.
Net change and comparison with prior trade: In the next component, we see the net change, which may be positive, negative, or flat, after the stock’s trade comes to a close. The chart also gives you a comparison of how the stock fared when compared with that of the previous trading session.
Types of Charts
To understand more about reading stock charts, you need to be able to identify the types of charts. The different types of charts include
1) Line charts: They have a single line connecting closing prices ranging from one specified period to another. They are the most basic of the stock charts, often giving day-to-day price change information. Line charts are useful in tracking how the price of a specific stock has progressed over time and are less noisy as they do not trace the opening, highest, and closing price of the stock.
An advantage of using this chart is that you are not hit with a glut of information, it is easier to identify the resistance and support levels, and thus, trading decisions can be made easier. It is the perfect chart for an amateur investor to begin reading charts and trading. However, more detailed information is necessary to form trading strategies.
2) Candlestick charts have the opening, high, low, and closing prices of a particular period plotted to form a candlestick figure. The wide part of the candle figure is called the real body, which gives the trader the opening and the closing price. They originated in Japan in the 18th century and were developed by Munehisa Homma. The charts are used by traders to track future price patterns of stocks depending on the past price movements.
When the closing price is higher than the opening price, the real body is filled in or made black. The extended lines above and below the real body are called wicks or shadows. These shadows the highest and lowest prices of the day.
3) Bar charts: Bar charts using vertical lines linking the highest and lowest prices with horizontal lines pointing to the left and right indicating the opening and closing prices, respectively. These charts are used by analysts to observe trend patterns, trend reversals, price fluctuations, and volatility. In case the closing price is lower than the opening price, the bar is usually in red, and when the opening price is above the closing price, it is presented in green or black color.
While interpreting bar charts, long vertical bars indicate volatility. When the difference between the highest and lowest price is high, it means investors are accumulating. When the number of green/black bars in a bar chart is, it means uptrend and implies downtrend when there are more red bars. The closing price relative to the opening and closing price also provides valuable data for forming investment strategies.
4) Point-and-Figure charts: When a chart plots the price movements of stocks and commodities without tracking them against time, it is referred to as point-and-figure charts. Thus, it contains a series of X’s and O’s stacked on top of one another. The chart is made of X’s and O’s arranged as columns to convey the price movements. The X’s and O’s denote the fall in price and rise in price, respectively. The main advantage of P&F charts is that they do not track small price movements and hence, they do not give false information about breakouts. The unit of price increase or decrease when an X or O is added is called the box size. The box size depends on the price of the stock and the investor’s preference. However, they fail to show when reversals happen and hence, the risk associated with stock needs to be monitored in real-time.
How to Read Stock Chart
The upper portion of the chart is referred to as the price chart, the blue line indicating the closing prices of the stock. The volume chart is the one seen at the bottom of the chart, seen as small vertical lines.
A red volume bar is an indicator that the volume of a particular day is less compared to that of the previous day. While the green volume bar represents that volume of the day was higher than the previous day’s. The black bar indicates the same price closing on the previous and present day.
Pinpoint the chart: Before an investor starts their analysis, identify the company ticker and know more about the company, its products, and its financial status. An investor should have thorough knowledge about the company investing in as it plays a crucial role in planning their investment strategy.
Follow the trend line closely: Paying close attention to the movement of the trend line in the chart helps in understanding drastic price fluctuations and identifying the right reason at the right time will save you from huge loss and in bagging maximum profits.
Lines of support and resistance: The levels of support and resistance also tell us when to buy, hold or sell a stock, indicating market sentiment of accumulation and distribution. This will help you take precautionary steps to protect your investments.
Price and Volume: The chart is a summary of all key information about the current and past prices, opening and closing prices for a day, along with the volume at which the stock is trading. Price and volume are interlinked to one another.
When the volume increases with a drop in prices, it may be indicating panic among investors and the selling of shares. On the other hand, an increase in price with rising volume may be due to the mass accumulation of stocks.
Moving averages: The moving averages are calculated through average prices calculated with time, to help in identifying the trend patterns.
Dividends: A chart will tell you about the company’s history of dividends distributed to its investors and this will help one form an idea about possible returns that they earn. It also informs whether stock splits have happened in the shares.
Basic and Advanced Chart Terms to Know
Axes: The straight lines which are used as reference and measurement framework are called axes. The charts have Y-axis and X-axis which track the volume and price, respectively.
Support: A straight line connecting three or more data points in the chart when the stock is trending downwards.
Resistance: Represented in the chart as a straight line connecting three or more data points of the stock when the stock is trending upwards.
Uptrend: Uptrend is when the stock price is moving in an upward direction and making higher lows and higher highs.
Downtrend: When a stock’s price is moving downwards while making lower highs and lower lows.
Sideways trend: When a stock is trading in a stable range for some time without any uptrend or downtrend
Relative Strength Index: A momentum indicator used in a stock’s technical analysis which measures recent price fluctuations to identify when they are overbought or oversold.
Volume: A measure for the number of stocks traded over a specified period.
Double-top pattern: A price reversal pattern formed after an uptrend with two peaks above the support level and when it retraces to the support level. When it breaks below the support level, a bearish trend reversal occurs.
Double-bottom: Another price reversal pattern formed by two lows below the resistance level and reaches the support level, when the stock breaks through this level the bullish trend begins.
How to read stock market charts patterns?
Reading stock market charts comes with practice and interpreting them helps in planning your investments. In a stock chart, the upper part and lower part give you information about the price and volume of the stock, respectively.
2)What is the share market chart?
Share market chart is a visual representation of the price-volume movement throughout a specified time. The X-axis represents the price and the Y-axis presents time.
3) How do you read red and green stock charts?
The green in stock charts indicates that the previous day’s closing price is higher than the previous day’s. The red in stock charts indicates that the previous day’s closing price is lower compared with the previous day’s.
4) What are the best techniques to use in reading charts for beginners?
As a beginner, charts help in gaining an overview of the company you are investing in, and reading them helps understand price, volume, returns, and other important information regarding the stocks.
5) Which brokers have the best charts?
Zerodha, Upstox, FYERS are some of the brokers providing the best charts in India.
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Disclaimer: Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. It is for educational purposes only.For more information, see our Legal disclosures here.